Update on Dejour’s Kokopelli and South Rangely projects
By Steven Ralston, CFA
Dejour Energy (NYSE MKT:DEJ) recently posted a new corporate presentation on the company’s web site which clarifies the capital financing to drill three additional wells from the existing pad at Kokopelli and to complete (perforation and hydraulic fracturing) of all four wells into the Williams Fork sandstone formation at Kokopelli project.
The drilling fund is providing $6.5 million of capital for the multi-well project in return for priority payout from initial production until 125% of the capital contribution (or $8.2 million) is received and for permanent ownership of at least a 33% working interest in the four-well project. Also, until the $8.2 million is collected, the drilling fund will hold ownership of 51.5% working interest in the four-well project while Dejour retains 20.0% WI. After the fund has received its 125% payout on the $6.5 million capital contribution, a working interest between 17.88% and 25% (depending on the cost participation of WI-holder Brownstone Energy) will revert to Dejour. During the entire production phase, Dejour will receive an infrastructure usage fee of $0.20 per MCF of gas produced. The fund also has the right of first refusal on the next multi-well project at Kokopelli, which would require the fund to provide an additional $8.5 million capital funding.
The terms of the financing do NOT pertain to Dejour's 71.5% working interest in the deeper Mancos shale gas play over the entire 2,200 gross acres of the lease and Dejour's 71.5% working interest in the gas sands of the Williams Fork formation over the remaining 2,120 gross acres.
On December 24, 2012, Dejour announced that production has commenced from the South Rangely discovery well (Federal 36-24) initially drilled in June 2011. The vertical 3,863-foot well encountered approximately 90 feet of hydrocarbon bearing siltstone in the Lower Mancos C sands. In late December 2011, the then test well was completed and fracture stimulated with 100,000 pounds of proppant. The well flow tested rich gas at a rate of 315 MCF per day for more than 10 days with no decline in production or pressure. In December 2012, the discovery well turned into production well when it began producing at a restricted rate of 250 MCF per day. With the discovery well now in production, the 6,300-acre unitized leasehold is Held By Production (:HBP).
Dejour has a 30% working interest in the South Rangely discovery well, and holds a 77% working interest in the remainder of the 6,300-acre unitized leasehold (or 4,850 net acres), which is on the western flank of the Douglas Creek Arch (a broad north-south trending anticline) and is directly south of the Rangely Oil field that has been operated by Chevron since the 1960's.
The next phase of the South Rangely project entails horizontal (Hz) development to explore for oil in a western down dip extension of the Niobrara formation, which typically is found at similar Mancos C attic gas accumulations in this area.
Dejour is expected to report fourth quarter and annual results in late-March. Results should indicate the rate of progress toward management’s expectation of achieving production of 700 BOE per day in 2013 at Woodrush. Also, management’s discussion and analysis in the annual filing may give some indication in the progress of bring the Kokopelli wells towards production.
Our rating on Dejour’s stock remains Outperform due to expected higher production levels from the oil and gas project at Woodrush and new gas production from South Rangely and Kokopelli. In addition, we look forward to the annual reserve assessments by Gustavson & Associates for Kokopelli and by AJM Deloitte for Woodrush. These evaluations directly drive our valuation model. A critical factor in the methodology used to derive the net present value (discounted at 10%) for Kokopelli will be the pricing assumptions for Natural Gas Liquids, especially ethane, propane and butane. Last year, Dejour received the reserve evaluation from Gustavson & Associates LLC in late February.
Lastly, in November 2012, two significant transactions were announced pertaining to natural gas leases in the Piceance and Uinta Basins: Vanguard Natural Resources LLC agreed to purchase 254,000 net acres of leasehold from Bill Barrett Corp. (BBG: NYSE) for $335 million, and a private company agreed to purchase 61,000 net acres of leasehold and the 30 miles of gathering pipeline of Antero Resources (also a private company) for $325 million. Though both transactions involve producing properties in the 50 MMCFE per day range, the deals may be indicative of the value of the Kokopelli project once the field demonstrates consistent production. The average valuation of the two agreements is roughly $1.4 million per BCFE of reserves. Based on the most recent resource estimates from Gustavson & Associates LLC, we estimate that the Kokopelli project contains 71 BCFE of reserves that would be classified as proven developed reserves (PDs), which would be valued at $99.4 million in a transaction consistent with the ones executed in November 2012. That value adds confirmation to the $95.9 million PV-10 utilized in our NAV valuation model.
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